Economy Grows At Anemic 0.7% In Final Quarter Of 2015

Ordinarily, the fourth quarter of the year is one in which the economy does fairly well, even in years in which the economy overall is somewhat weak. Businesses spend a little extra to get money off the books prior to the end of the year for tax purposes, and, of course, consumers generally open up their pocketbooks for holiday spending that is often aided by employer-provided holiday bonuses. This year, consumers and businesses also likely found themselves with extra money to spend thanks to the fact that fuel and energy costs were down significantly due to the fall of the costs of oil and gas, and the somewhat unusually warm start to winter meant that heating costs were likely below normal. Despite all of that, though, the initial report about Gross Domestic Product grown for September through January revealed a weaker economy than might ordinarily be expected, and that raises questions about the state of the economy headed into 2016:

The American economy barely grew last quarter, finishing the year much as it had started and stoking concern about its momentum in 2016.

Over all, the economy expanded at an annual rate of just 0.7 percent in the fourth quarter of 2015, the Commerce Department said Friday.

Little more than a month ago, economists thought growth was running at more than twice that pace, but data showing tepid business activity, still-sizable inventories and slightly more cautious consumer spending during the holiday season indicated that the economy was likely in the midst of another anemic patch.

It could have been worse — a few economists on Wall Street had thought the economy might have actually contracted last quarter, while others predicted no growth.

As it turned out, the slowdown was brought on by slower sales of durable goods like cars and appliances, a weaker trade picture and falling inventories. Services held up a bit better, underscoring how domestically driven sectors are faring much better than industries that depend on overseas demand.

For all of 2015, the economy grew 2.4 percent, identical to the temporecorded in 2014 but considerably better than the 1.5 percent gain for 2013.

Despite the lackluster numbers for gross domestic product, by other yardsticks the economy looks considerably healthier.

“There are definitely problem areas, but consumer spending, housing and the nonenergy parts of capital spending are still fairly solid,” said Nariman Behravesh, chief economist at IHS, a research and consulting firm.

Friday’s report is the first of three estimates the Commerce Department will make for growth in gross domestic product, and as more data comes in, the figure could be revised upward or downward. The next estimate will be released on Feb. 26.

One major headwind has been shrinking inventories, which reduced growth by nearly half a percentage point last quarter.

After big increases in goods at warehouses and on store shelves lifted growth in the middle of the year, “there was probably some payback in the fourth quarter,” Mr. Behravesh said in an interview before the release of the data.

“That affects top-line growth but doesn’t really say so much about the fundamentals of the U.S. economy,” he added.

Looking ahead, Mr. Behravesh expects the economy to expand at a rate of about 2.5 percent in the first half of 2016, with the unemployment rate continuing to fall and salaries beginning to show signs of life after years of stagnation.

“I think it’s entirely possible we could see unemployment fall to 4.5 percent by the end of the year,” he said.

Still, expectations for the coming quarters have been drifting lower as weaker data for the fourth quarter of 2015 has accumulated in recent weeks.

Big business has been noticeably cautious to invest, despite healthy profits in many industries.

The strong dollar and weakness in Asia and Europe have hurt many manufacturers, commodity producers and other exporters, especially in the Midwest.

(…)

One mystery for economists has been why lower oil prices haven’t done more to stimulate growth, especially among consumers.

One explanation is that Americans are saving a substantial portion of the windfall at the gas pump or using it to pay down debt, which ultimately benefits the economy even if it represents a drag in the short term.

Another possibility is that consumers remain skeptical about how long gasoline prices will stay below $2 a gallon on average, the lowest they have been since the depths of the financial crisis in late 2008.

It’s entirely possible, of course, that we’ll see the growth figures for the fourth quarter improve as the revisions are released in February and March, but at least initially one has to admit that this is less than an ideal report under the circumstances. Ideally, economic growth should be above two percent per year, and preferably above 2.5% per year, on a consistent basis. Otherwise, the economy is essentially just treading water and could easily be pushed into another period slow growth or recession by factors beyond anyone’s control such as the weather, overseas conflict or increasing tensions, or economic shocks from a nation such as China. The fact that we’ve seen evidence of all three in just the past month, combined with this report, should at least be cause for concern going forward. As it is, over the past six years, we’ve seen only one year in which the economy has grown at a 2.5% rate and no year since 2005 during which the economy has grown at anything approaching a 3.0% rate. This means that the recovery from the Great Recession has been among the weakest we’ve seen from any economic downturn since the Second World War, and it suggests that the economy as a whole remains far more vulnerable to being tossed into a recession than many people may realize.

Economists surveyed by The Wall Street Journal had expected GDP to grow at a 0.8% pace in the October-to-December span.

The U.S. economy has faced an array of crosscurrents over the last year. Steady job gains, an improving housing market and banner auto sales helped underpin growth through much of the year. But rapidly falling oil prices and a strong dollar have had a mixed impact on businesses and consumers. And a slowdown in China, persistent weakness in Europe and volatile financial markets have been a drag.

The latest reading concludes another year of steady, but unspectacular, growth. For all of 2015, GDP expanded 2.4%, the same as 2014 and roughly in line with the 2.1% average since 2010, the first full year after the recession.

What is less clear is whether the fourth quarter was another dip that will be followed by a rebound—as has happened several times since the recession ended in mid-2009—or whether it signals a more persistent slowdown.

“The [Fed] is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook,” officials said in a statement.

Low rates are meant to spur investment and hiring but also risk distorting markets. By keeping rates near zero, the Fed also is left with less ammunition in the event of another recession.

Friday’s GDP numbers showed inventory stockpiles, trade and business investment were drags on the economy during the fourth quarter. Inventory figures can be volatile and a slowdown there may well ease in the early part of 2016. A decline in net exports, meanwhile, is more a reflection of a strong dollar and overseas developments than domestic demand.

A slowdown in consumer spending and a decline in business investment could be more of a concern.

Personal consumption, which accounts for more than two-thirds of economic output, rose 2.2% in the fourth quarter, down from 3% in the third quarter. Cheaper gasoline and steady job gains weren’t enough to allay a sense of caution in the final months of the year.

But even with the fourth-quarter pullback, full-year consumer spending in 2015 grew 3.1%, the fastest pace in a decade.

Nonresidential fixed investment, a measure of business spending, fell 1.8% in the fourth quarter as companies trimmed outlays on structures and equipment.

Spending in the energy industry has been especially constrainedamid low commodity prices—outlays on mining, shafts and wells tumbled 35% during all of 2015, the sharpest drop in nearly three decades.

Spending on residential investment, such as new home construction and home remodeling, advanced 8.1% in the fourth quarter. The housing market in 2015 was by some measures the strongest since before the recession.

Overall government spending expanded. Federal nondefense spending grew 1.4% and defense spending rose 3.6%. Spending at the state and local level contracted 0.6%.

If there was any good news from the report, it’s the fact that the numbers continue to show that there’s no evidence that inflation has returned at either the consumer or the wholesale level. This is especially relevant given the fact that nearly a decade of low interest rate policy from the Federal Reserve has led many old inflation hawks to raise concerns that the old enemy from the 1970s could return in the face of essentially free money from the Federal Reserve. The fact that it has not suggests that, notwithstanding some of the arguments that the Federal Reserve has used to justify its initial increase in interest rates for the first time in ten years, there are few signs of the economy being hit with an inflationary spiral any time soon and that slower growth and the risk of recession are arguably more of a concern than the negative impact of low interest rates. The Federal Reserve appears to recognize this in its, as always, cryptic and hard to decipher public statements, but at the same time it also seems clear that the institution remains committed to raising interest rates, albeit modestly, at least once every quarter going forward. If this first report after the increase in December is any indication, though, it seems as though the Fed may be miscalculating the need for immediate interest rate increases.

In addition to Federal Reserve policy, of course, reports like this have implications for the race for President as well as the other political races that will be on the ballot in November. The best case scenario for Democrats would be a solidly growing economy along the lines of what we’ve been seeing since 2010. It certainly hasn’t been a perfect or consistent recovery, and there are questions about how strong the economy actually is at the moment, but the numbers are moving in the right direction in all respects and that gives Democrats running on the President’s record something to point to as a reason to return them to office and continue the status quo. If the economy starts turning negative, or even just stagnating, though, then it will add ammunition to Republican arguments that the economic recovery has been exceedingly weak and that the nation needs to revise taxation and other policies in order to spur economic growth. A stagnant or shrinking economy is also likely to provide ammunition to those such as Donald Trump who have argued that increased legal and illegal immigration and international trade has hurt the American economy notwithstanding the fact that there is no evidence to support either of these contentions. For the political implications alone, then, it will be important to pay attention to these economic numbers going forward.

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About Doug MataconisDoug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May, 2010 and also writes at Below The Beltway.
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@al-Ameda: It’s not just China, Europe is still a mess, Japan just went to negative interest rates, Canada is severely hurting, emerging markets and commodity currencies across the board have taken a beating. This really shouldn’t have come as a surprise. Economic data has been getting worse for the last 6 months and bond spreads have been blowing out for the past couple months.

With the Fed still committed to fighting nonexistent inflation and the Congress unwilling to do much of anything other than rush home to run for re-election it’s hard for me to imagine what could be done to prevent an economic contraction.

Note, too, that the flight to the dollar is a lot of last quarter’s slowing in growth. Expect that to continue. Also, oil production is now a large enough chunk of the U. S. economy that when it slows it slows economic growth, too. In other words lower oil prices are now a mixed blessing.

If there was any good news from the report, it’s the fact that the numbers continue to show that there’s no evidence that inflation has returned at either the consumer or the wholesale level. This is especially relevant given the fact that nearly a decade of low interest rate policy from the Federal Reserve has led many old inflation hawks to raise concerns that the old enemy from the 1970s could return in the face of essentially free money from the Federal Reserve.

you might want to check junk bond credit yields and equity valuations before you make that statement. There’s tons of inflation in the system, it’s just not showing up in the CPI.

@Avid sportman: Whoops, not Doug’s words, It’s quoted from the article, apologies, haven’t had my coffee yet. My point still stands. Those looking for weakness in employment before they worry about the economy are going to end up way late to the party.

Jitters over China, the crashing price of oil, unease about the Mideast, etc.

The best thing the US could do right now is to say to HELL with the deficit and sell a whole chunk of US treasury bonds to replace all those bloody lead pipes out there. Cover the cost by cutting back on the expensive military hardware, put a Tobin tax on equities trading to whack the HFTs, and start gradually raising taxes back to closer to 1950s levels.

On immigration, I’d throw a sop to the “oh my god the illegal people are taking over” by requiring every company to show all its employees are either US citizens or otherwise legitimate workers. And back it up with teeth. Forget tracking down illegal immigrants–drying up the income sources will be sufficient. And stomp on the whining of “oh, we have to bring in high tech people from outside.” No you don’t, you idiots. You simply have to start paying salaries that US Citizens will go for. Demand and supply and price works the same way in the employment markets as it does for widgets, and the US Government isn’t supposed to bail you out because you have a hankering for a MacLaren for $100.

The lead in the plumbing and our aging infrastructure will get us before ISIS will.

Doug, for four straight quarters now you have announced a disappointing quarter of growth, only to later revise the estimated growth upward when the final corrected numbers came out. For once, could you please wait for the real numbers before announcing doom?

The best thing the US could do right now is to say to HELL with the deficit and sell a whole chunk of US treasury bonds to replace all those bloody lead pipes out there. Cover the cost by cutting back on the expensive military hardware, put a Tobin tax on equities trading to whack the HFTs, and start gradually raising taxes back to closer to 1950s levels.

I couldn’t agree more but it won’t happen as long as the Rethuglicans are still largely in charge. I’ts not just the lead pipes but our entire infrastructure that needs to be repaired or replaced.

On immigration, I’d throw a sop to the “oh my god the illegal people are taking over” by requiring every company to show all its employees are either US citizens or otherwise legitimate workers. And back it up with teeth.

This would work great if Republicans actually wanted to DO something about illegal immigration. But since all they want to do is score points with the base by complaining about immigration it is an awful plan from their perspective. And I don’t see this being implemented via executive order. Too bad.

In this age of a global economy we are slaves to other economies. The price of oil is a big one, the once booming economy of Houston is suffering as more and more oil company employees find themselves unemployed. Europe is still in the economic doldrums and the Chinese and Japanese economies are in the decline. The Australian economy is suffering because of the Chinese reduced demand for coal. It reminds me of Idaho’s Silver Valley that always mined more lead than silver and went bust after they took the lead out of gasoline.

Lack of Global Demand, Oil Slump & layoffs, and retailers getting killed all make sense, but real unemployment U-6 is at least 10% unemployed. The inevitable decline of corporate profits will get worse this year before we fall into recession. The strong US Dollar also will hurt tourism here as well as our Exporters. Maybe one of our wonderful candidates has the answer?!!

I personally would like to finally spend some money on our infrastructure, trains, highways, and bridges. I have no idea why there are so few Public and Private Partnerships between the federal government and Wall Street. Perhaps the American people should start a Gofundme page so we can hire a lobbyist like everyone else who wants anything done in DC.

@Joe Gage: Actually, the U-6 is exactly 9.9%. There is nothing I love more that the insinuation that the u-6 is somehow a secret number derived by citizen journaislts working from their basements, and not a government statistic that is created by the same “Chicago people” as the U-3, official unemployment rate. Btw- U-6.

Btw- since the BLS started tracking it, the U-6 had never been below 7.1%, not even in the height of the Clinton boom, when the labor market was truly and really tight. If employment growth this year is similar to last year’s (a big if, unfortunately), we should be in the neighborhood of that number at the end of the year.

The signs are not good. The head of the Bank of Scotland has told people to “sell everything”. Unemployment is more near 20% when you factor in those who have given up and quit looking for work. Many went back to work in jobs such as school crossing guard and movie theater popcorn machine technician. So the unemployment picture remains bleak in many areas.
Do not believe these pie in the sky federal reports.
See “The Crash of 2016” and crashingbanks.com
And “Secrets of the Federal Reserve”

I don’t consider the U-6 a secret number, but only that it does not get enough prominence when they make these announcements. We can also look at the labor participation rate which though somewhat skewed by retiring baby boomers is also an indicator of our economy.

To me, one of the major problems are corporations hiding their profits oversees and reinvesting that money there. My concern is going forward and not nitpicking on whose to blame. Our kids are not getting trained for the right jobs and technology will make many workers obsolete.
We need a healthy combination of Government spending, Business spending, and Consumer spending to get the economy back on track. Consumer spending will remain active as long as the government and the Fortune 50 convince us to keep buying crap we don’t need.

@grumpy realist: While I see your point, you are talking about a huge (or is that yyuuuuuuuuuge?) transfer of wealth here. How are you going to sell that idea to guys who are struggling by on only having gotten 90% of the gains produced during the recovery?

You gotta understand, these guys are struggling under a draconian tax system that already steals too much of their money. What are you thinking?